California Insurance Crisis Explained: Prop 103 to FAIR Plan

Published Date: 08/27/2024

California’s insurance market is at a breaking point. Premiums are rising, carriers are withdrawing, and homeowners are increasingly being forced onto the California FAIR Plan—the insurer of last resort that was never designed to be a first line of defense.



For many Californians, it feels like the system meant to protect them is collapsing. But how did we get here? And what can be done to restore balance to the marketplace?

In a recent episode of Insurance Hour, insurance expert Karl Susman traced the roots of the crisis back to Proposition 103 and explained how the Sustainable Insurance Strategy introduced by Insurance Commissioner Ricardo Lara could reshape the future of coverage in California.

The Origins of Proposition 103 and Its Lasting Impact

Proposition 103 was approved by California voters in 1988 and was widely viewed as a consumer victory at the time. The state was facing public outrage over high auto insurance rates, and the measure aimed to rein in insurer pricing power.

The law required an immediate 20% rate rollback to 1987 levels and granted the California Department of Insurance (CDI) authority to approve or deny all future rate increases. It also severely limited how insurers could calculate risk, requiring rates to be based primarily on:

• Driver safety record
• Annual miles driven
• Years licensed

While these standards made sense for auto insurance in the 1980s, Susman explains that they stripped insurers of the ability to use forward-looking data and modern risk modeling—limitations that still affect property insurance today.

This rigidity, he argues, has echoed across the entire insurance market for more than 35 years.

How Auto Regulation Triggered a Property Insurance Breakdown

Although Proposition 103 targeted auto insurance, its framework soon shaped all lines of coverage in California, including homeowners insurance.

As wildfire risk intensified, storms grew stronger, and rebuilding costs soared, insurers remained locked into backward-looking data. They were forced to price modern risk using decades-old loss trends.

“Imagine pricing a home policy in 2025 using loss data from 1990,” Susman noted. “That’s essentially what California law forces insurers to do.”

The financial consequences were massive:

• In 2017, over 9,000 fires burned more than 1.2 million acres and caused $18 billion in damages.
• In 2018, the Camp Fire added another $16.5 billion in insured losses.

Nationally, insurers typically pay out about 59 cents in claims for every $1 collected in premiums. In California, that number has climbed to $1.15 or more.

“You can’t pay out more than you take in and stay in business,” Susman said. “These companies are for-profit entities, not government programs.”

The Rate Approval Bottleneck Slowing the Market

Even when insurers try to raise rates responsibly, Proposition 103’s approval process creates long delays.

Rate filings must be submitted to the CDI with extensive actuarial support, often taking 280 to 300 days for approval. During that time, insurers operate at a loss while inflation, construction costs, and reinsurance expenses continue to rise.

“Imagine trying to run a business when you have to wait 280 to 300 days before you can change your pricing,” Susman said. “It makes staying competitive almost impossible.”

These delays directly contributed to the widespread pullback of insurance carriers in recent years.

The Insurance Carrier Exodus and Loss of Competition

In 1988, California had more than 100 insurers actively writing property coverage. Today, that number has dropped to roughly 70, with many major carriers severely restricting new policies.

Notable examples include:

• State Farm halting most new homeowners business
• Allstate pausing new homeowners policies
• Farmers reducing exposure in wildfire-prone regions

With fewer carriers competing, premiums rise, coverage options shrink, and homeowners face limited choices. When coverage disappears entirely, the FAIR Plan is often the only option left.

The California FAIR Plan’s Growing Burden

The FAIR Plan was created in 1968 as a last-resort fire insurance program for homeowners who could not obtain coverage elsewhere. It was never intended to become a primary source of insurance.

Today, it insures more than 3% of all California properties—a figure that continues to climb each year.

“It was never meant to be a primary option,” Susman said. “Now, in some regions, it’s the only one.”

FAIR Plan policies typically cover only fire and lightning. Homeowners must purchase separate difference-in-conditions (DIC) policies for water damage, theft, and liability—significantly increasing overall costs.

Even more troubling, FAIR Plan losses are backed by the same private insurers that have withdrawn from the market.

“It’s like a circular firing squad,” Susman warned. “The same companies saying they can’t afford to write in California are the ones paying for FAIR Plan losses.”

Rising Reinsurance Costs Compounding the Crisis

Reinsurance—insurance for insurance companies—is another major driver of the crisis. Reinsurers help spread catastrophe risk globally so no single carrier bears the full burden of massive losses.

But after years of record wildfire losses, reinsurance rates have skyrocketed. Under outdated California rules, insurers cannot fully pass those rising reinsurance expenses into their rate filings.

As a result, carriers are forced to absorb unsustainable losses or reduce exposure in the state.

The Sustainable Insurance Strategy and Market Reform

In response to the growing instability, Insurance Commissioner Ricardo Lara introduced the Sustainable Insurance Strategy (SIS), a sweeping plan to modernize California’s insurance regulations and encourage private carriers to return.

The strategy introduces several key reforms:

Requiring Insurers to Write in High-Risk Areas

Insurers must commit to writing at least 85% of their statewide market share in wildfire-distressed areas to maintain their presence in the California market.

“It’s about restoring access,” Susman said. “If private insurers return to these areas, we can reduce dependence on the FAIR Plan.”

Allowing Forward-Looking Catastrophe Models

For the first time, insurers will be permitted to use predictive catastrophe models that account for climate change, wildfire behavior, and mitigation efforts.

“If carriers can price risk more accurately,” Susman explained, “they can stay in the market and remain solvent—which means consumers get more options.”

Incentivizing Risk Mitigation

Homeowners who upgrade roofs, clear defensible space, or use fire-resistant materials may qualify for premium discounts, creating safer communities and more affordable insurance.

Reforming the FAIR Plan

The SIS proposes improvements to FAIR Plan transparency and commercial coverage while maintaining the long-term goal of transitioning policyholders back into the private market.

Fixing the Intervener Process

The intervener system—originally designed to allow public participation in rate filings—has been criticized for causing major approval delays. The strategy seeks to broaden participation and reduce gridlock.

When Homeowners May See Market Relief

The CDI has begun rolling out reforms through the end of 2024, with updated frameworks expected to take full effect in early 2025.

Susman believes homeowners may see improved market availability and new carrier participation by the first quarter of 2025.

But he cautioned that prices will not return to pre-crisis levels.

“We’re not going back to 2018 pricing. Things cost more. Inflation, construction, reinsurance—it all adds up. Premiums will still be higher, but at least you’ll have options again.”

What Homeowners Should Do Right Now

While reforms unfold, Susman urges homeowners to stay proactive:

• Shop early and don’t wait for renewal notices
• Invest in wildfire mitigation and document improvements
• Fully understand FAIR Plan limitations and supplement with DIC policies
• Stay informed through brokers and CDI updates

“The days of having five quotes in five minutes aren’t here yet,” Susman said, “but they’re coming back.”

The Bigger Picture: Trust, Data, and Competition

California’s insurance crisis is not just about pricing—it’s also about trust, transparency, and market balance.

Homeowners need reliable coverage. Insurers need sustainable pricing. Regulators need accountability. The Sustainable Insurance Strategy attempts to align all three.

“California is the first to face this crisis,” Susman said, “but we’ll also be the first to solve it. We’re too big, too important, and too innovative not to.”

If successful, California’s reforms could become a national model for modern insurance regulation—one that preserves consumer protection while restoring competitive, resilient markets.

Because in the end, insurance isn’t just about managing risk. It’s about protecting recovery, rebuilding, and long-term economic stability.